Oil Producers to Make Record Profits This Year, Report Says

June 24, 2021

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by Kevin Crowley (Bloomberg News) The world’s publicly traded independent oil producers will make record profits this year, surpassing the levels reached when crude hit an all-time high near US$150 a barrel more than a decade ago, according to Rystad Energy.

Combined free cash flow from the sector is expected to surge to US$348 billion, beating the previous high of US$311 billion in 2008, Rystad said. Key to the turnaround is U.S. shale, with the industry expected to reverse years of losses in 2021 and make "super profits" of nearly US$60 billion of free cash flow before hedges.

Surging oil prices will add to producers’ revenue, but profits will be super-charged by executives determined to constrain capital spending on new output, the Oslo-based consultant said in a note authored by Espen Erlingsen, head of upstream research. This is the opposite of previous cycles, when crude rallies prompted companies to spend heavily on exploration and production in search of fresh supplies.

But the forecast raises questions about how disciplined producers will remain about keeping output in check as the surge in crude prices drives outsized profits. So far, explorers have largely heeded investor pressure to rein in spending and return cash to shareholders. READ MORE; includes VIDEO

As gasoline prices rise, Biden has a problem at the pump (Houston Chronicle)

How Tax Breaks for Fossil Fuel Companies Inflated Profits for Oil and Gas Drilling: A new study estimates that tax breaks boosted the value of new oil and gas projects by up to $20 billion a year. (The New Republic)

Federal subsidies boosted US shale oil and gas profits by billions of dollars, study finds: A new SEI analysis finds that federal oil and gas subsidies helped spur and sustain the US shale boom. (SEI)

How subsidies aided the US shale oil and gas boom (SEI)

How Last Century’s Oil Wells Are Messing With Texas Right Now (Bloomberg/Ampgoo)

Big Oil Is Spending Big On Dividends And Debt, Not Clean Energy (Oilprice.com)

Big Oil Squeezes Renewable Energy Profits as Commodities Rally (Bloomberg)

Excerpt from Houston Chronicle: Earlier this week, Rep. Jim Jordan, R-Ohio, took to Twitter to point out that gasoline prices have risen 86 cents gallon over the past year to a national average above $3 a gallon, adding the tag line, “President Biden’s economy.”

Seventeen months from the midterm elections, the implications were clear. With Biden in the White House, promoting a historic shift towards clean energy in a race against climate change, Americans would come to expect higher energy costs.

Rising gasoline prices, like higher taxes, have long presented danger for politicians as voters notice bigger chunks of their earnings going into their gas tanks, but Biden potentially faces a bigger risk of a backlash. While political leaders in the past could blame higher gasoline prices on the ups and downs of global oil markets or the greediness of OPEC, Biden’s messaging on climate change — including moves to lower oil production — just as gasoline prices rise presents a particular political challenge.

“It’s an easy move to say Biden is doing all this stuff on the environment and it’s causing gas prices to rise. There’s little evidence of that, but that has never gotten in the way of a good political argument,” said Frank Maisano, a Washington communications consultant. “You never want to be on the rising end of gas prices from a political standpoint. It’s what people see every day. You can drive past 12 gas stations on the way home, and the prices are blaring out.”

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Patrick De Haan, head of petroleum analysis at the fuel-price tracking website Gas Buddy, said that considering the events of the last year, higher gasoline prices were not taking much space in the minds of American motorists who are likely thrilled to be traveling again.

“It’s not as much a pinch point if it wasn’t coupled with a strong rebound in the economy,” he said. “This is not like 2008, with gas at $4 a gallon and pizza delivery and everything else through the roof.”

Since late 2014, when the U.S. fracking boom and a refusal by the OPEC cartel to lower production combined to drive down gasoline prices more than 40 percent in just six months, Americans have enjoyed relatively good deals at the pump. Until now, the highest average monthly prices came in the summer of 2018, reaching an average price of $2.99 a gallon in May, and prompting then president Donald Trump to turn his Twitter ire on OPEC. READ MORE

Excerpt from The New Republic: During infrastructure negotiations, Republicans have been eager to frame any and all green spending as a wasteful add-on that picks winners and stifles competition. But the United States already picks winners—and a new report from the Stockholm Environmental Institute, a nonprofit think tank, provides one of the first-ever estimates for just how much these subsidies have been worth to one of the world’s most harmful industries. By boosting projected earnings by billions of dollars a year, government policy has been meddling in supposedly free markets—and driving up emissions—for years. Strikingly, the researchers estimate that these tax breaks are worth billions more to firms than the government itself admits.

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The study homes in on three long-standing producer-side subsidies, whose benefits accrue to drillers: a provision allowing them to expense so-called intangible drilling costs, or IDC, rather than depreciate them over many years; the accelerated amortization period for geological and geophysical expenses, allowing drillers more quickly to write off those expenses; and the percentage depletion allowance, a 15 percent deduction on gross revenue year after year. Just two of those—IDC expensing and the percentage depletion allowance—inflated the expected value of new oil and gas projects by up to $20 billion in a single year.

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The fossil fuel industry likes to argue that it doesn’t get any special treatment in the tax code, receiving only “ordinary deductions ensuring that companies are taxed only on real income.”

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In a 2015 self-assessment to the G20, the U.S. itself defined 16 tax benefits as producer-side fossil fuel subsidies, including those examined in the SEI report. The assessment finds that “like other oil and natural gas preferences,” allowing companies to expense intangible drilling costs “distorts markets by encouraging more investment in the oil and natural gas industry than would occur under a neutral tax system.”

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With precious little time left to get off fossil fuels, lawmakers will have to decide if tax breaks for polluters are worth keeping around. And given that credit remains cheap, the other question is whether legislators interested in building a burgeoning clean energy economy in the U.S. might consider directing the same level of state support to zero-carbon power that has historically flowed to fossil fuels. READ MORE

Excerpt from SEI: The study’s main findings include:

Two tax incentives alone – the expensing of intangible drilling costs and percentage depletion provisions – increased the expected value of new oil and gas projects by billions of dollars in most years and over $20 billion in some high-price years (2008 and 2010–2014).
These two subsidies added substantial value to new unconventional oil and gas projects considered in the Bakken formation in 2005–2006, the Appalachian and Haynesville regions in 2008, the Eagle Ford play in 2009–2010 and the Permian Basin in 2011–2015.
Certain oil and gas firms benefitted more than others. For example, in 2008, subsidies boosted Chesapeake Energy Corporation’s expected project returns by $9 billion, primarily from fields under development the Marcellus Shale of the Appalachian Region and in the Haynesville Region. In 2012, the three subsidies amplified Pioneer Natural Resources’ expected project returns by $8 billion, mainly from fields developed in the Permian Wolfcamp shale play.
From 2007–2014, when oil prices were high (above $60/barrel), subsidies had relatively little effect on the decision to drill. However, in low-price years, such as 2016, subsidies increased expected returns enough to push more than 30% of new oil projects into profitability, greenlighting their investment decisions.
Subsidies likely played a substantial role in making new gas projects in Appalachia viable starting in 2010, when more than 30% of new gas projects may have been subsidy-dependent.

“This analysis shows that the tax code is a powerful policy tool – one that can influence what energy projects get developed. As the Biden administration and Congress consider reforming the tax code, they can think about how to move away from fossil fuel development, using the tax code instead to support investments that lead to improved public health and cleaner energy”, said SEI Senior Scientist Peter Erickson, the study’s lead author. READ MORE

Excerpt from Oilprice.com: Big Oil divested assets worth $198 billion in the five years to 2020, BloombergNEF has calculated, but has not used the proceeds to invest in green energy.

Instead, the report says, the proceeds from the divestments—four times greater than what Big Oil spent on green energy in the period—were used to pay down debt, distribute dividends, and launch new oil and gas projects.

In light of the recently released report by the Intergovernmental Panel on Climate Change, this will likely infuriate some. On the other hand, in light of surging energy demand in many parts of the world, which has led to respective surges in gas prices, it shows long-term thinking on the part of Big Oil.

Still, there was a marked and unsurprising difference between European supermajors and their U.S. peers. The European Big Oil companies spent more on low-carbon energy, led by Norway’s Equinor, whose investments in alternative energy exceeded its divestment proceeds. READ MORE